EU Gets Tough On China Subsidies

The European Commission may be poised to adopt a much tougher trade stance on subsidies that the Chinese government gives to its exporters.

The immediate issue is coated fine paper, which is used to make high-quality prints. The commission, the European Union’s executive arm, last month found that the Chinese coated paper industry receives major subsidies that can be legally counteracted with import tariffs by the EU.

It was the first time the commission has examined whether to impose tariffs to fight Chinese subsidies. And the results of the investigation have Chinese companies and the Chinese government seriously worried that the commission is setting a major precedent that will make it easier for Chinese companies to be targeted in anti-subsidy complaints.

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A big problem is the commission’s treatment of the Chinese financial system, said Vassilis Akritidis, who is representing Asia Pulp & Paper, one of China’s largest paper makers, in the trade dispute. The large credit lines that Chinese government-controlled banks provide to their exporters have been a major concern for Western companies who are increasingly competing with Chinese companies in the EU.

The commission says in its findings, which are still confidential, that it’s assuming Chinese companies should have a junk credit rating when determining whether government-controlled banks provide subsidized loans to companies. That particular finding is a form of punishment against the Chinese government and companies for not cooperating with the investigation.

“Given the total non-cooperation of the (Government of China) as regards providing information on, or access to, state-owned banks, it is considered appropriate … to downgrade this credit rating to BB (non-investment grade-speculative), so as to avoid rewarding such non-cooperation,” according to the findings.

That means money lent at anything below a non-investment grade interest rate would be considered a subsidy. The conclusion appears to apply across the entire Chinese economy, not just to firms in the paper sector, Mr. Akritidis said.

“We are very concerned about any unreasonable blanket approach that would condemn the entire country, thereby turning China in future investigations into a sitting duck for any industry that wants to attack,” he said.

The commission is accepting comments on the document until the end of this week, so it may yet change its tone before asking EU national governments to adopt its conclusions.

Coated fine paper was also the target of an investigation into whether Chinese firms were dumping their product at unfairly low prices on the EU market. That probe resulted in duties of roughly 20% on Asia Pulp & Paper and Shandong Chenming Paper Holdings Ltd. The finding of subsidies won’t change those rates, because the commission doesn’t double-count the gains from dumping and the subsidies.

The commission started its investigation this year after receiving complaints from a group of EU paper producers, led by the European unit of South African paper giant Sappi Ltd. (SPP).

UPDATE: The idea that the commission’s position in the coated-paper case could set a precedent is “way, way overstated,” says Laurent Ruessmann, an attorney for the European coated paper-maker’s association, CEPIFINE, which brought the trade complaints.

Ruessmann says that it’s only natural for the commission to make negative assumptions about China’s banking system if it feels the government hasn’t cooperated with its investigation.

Comments (2 of 2)

There is no separation of power, and no checks and balances in the Chinese bureaucracy. Every branch is directly substituted to a totalitarian party. They can make the numbers look anything they want. That is also the reason why there is a lack of transparency: independent sources cannot verify the data, and that is exactly how they want it. It's as if Madoff inc. is running China...one day this fakery will blow up (and that is why they are holding US treasuries - trying to salvage some of their scam into real money). Zai jian!

9:52 pm March 1, 2011

John Boyer wrote:

The Chinese government is such a big cry baby. With their financial system/government not fairly valuing their currency, building up big trade surpluses, and using subsidies in order to perpetuate their competitive influence in international markets they have absolutely no room to talk. (China’s credibility and reputation as a valuable source of foreign investment and trade are wearing thin on the heels of the world. No matter how much we loathe the questionable intentions of this behemoth we still continue our relations. Without China as a trade partner the entire world will suffer.) The overabundance in which the United States subsidizes our agricultural products allows us to competitively price our goods which unfortunately limits free and fair trade. At least we are ethical when it comes to pegging our currency at fair market values. We do this to be a team player to the surrounding countries that depend on our economic success (especially the EU). The EU with all 27 members provides a quintessential market for free and fair trade without hiding behind shady trade barrier tactics. In the foreseeable future China and the United States will reign at the top two world economies (this might or might not hold true). Big countries should be salivating over the fact that international trade block size will continue to increase. Taking China down a peg or two in the financial loan ratings scale should inspire them to realign their economic mentality to the rest of the worlds. Utilitarianism is where it’s at baby! The greatest good for the greatest number!

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